Hollydale's is a clothing store in East Park. It paid an annual dividend of $2.70 last year to its shareholders and plans to increase the dividend annually at 3.5%. It has 430,000 shares outstanding. The shares currently sell for $19.39 per share. Hollydale's has 12,000 semiannual bonds outstanding with a coupon rate of 8.5%, a maturity of 22 years, and a par value of $1,000. The bonds are currently selling for $1,167.12 per bond. What is the adjusted WACC for Hollydale's if the corporate tax rate is 15%?
What is the adjusted WACC for Hollydale's if the corporate tax rate is 15%?
Value | Weight | Cost | |
Equity | 8,337,700 | 37.3% | 17.9% |
Debt | 14,005,440 | 62.7% | 7.00% |
Total | 22,343,140 | WACC | 10.41% |
Value = No. of shares x Price
Weight = Value / Total
Cost of equity, re = D0 x (1 + g) / P + g = 2.70 x (1 + 3.5%) / 19.39 + 3.5% = 17.91%
Cost of debt, can be calculated using I/Y function on a calculator
N = 22 x 2 = 44, PV = -1,167.12, FV = 1,000, PMT = 8.5% x 1000 / 2 = 42.5
=> Compute I/Y = 3.5% (semi-annual)
=> Annual cost of debt, rd = 3.5% x 2 = 7%
WACC = wd x rd x (1 - tax) + we x re
= 62.7% x 7% x (1 - 15%) + 37.3% x 17.91%
= 10.41%
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